Call for limits on bank bonuses

The Financial Stability Board (FSB) will recommend that governments place limits on bank bonuses, when it presents its report to the G20 leaders in Pittsburgh next week.

In a release issued today, the FSB says banks need to take steps to conserve capital, and limit dividends, share buybacks, and compensation.

In its second meeting since the body was established in April, held yesterday in Paris, the FSB discussed the measures needed to prevent “renewed banking sector strains and turbulence in asset markets”. It also considered other risk areas such as the impact on markets of rapidly rising government debt.

It will set out specific guidelines on the governance, structure and disclosure of bonuses which will limit the amount of compensation allowed, and consequently conserve banks’ capital

The FSB says steps have been taken towards a new framework which will require banks to have more and better quality capital reserves. It says its members agree that there should be better standards of valuation and accounting, which would allow financial institutions to recognise credit losses at an earlier stage in the cycle.

Meanwhile, good progress has been made towards improving the principles for compensation, introducing central counterparties for derivatives, better regulation of hedge funds, and the development of credit ratings agencies, the FSB adds.

The body warns that these measures are especially important against an economic backdrop that is still unstable. “Despite welcome signs of movement toward normalisation of markets in recent months, fragilities remain and the supply of credit remains weak,” it says.

The FSB is a committee of representatives from all the G20 economies, members of the Financial Stability Forum, and the European Commission. Its chairman is Mario Draghi, the governor of the Bank of Italy.

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